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Nalco: Profits decline due to high cost - Views on News from Equitymaster

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Nalco: Profits decline due to high cost

Aug 21, 2013

Nalco has announced its results for the quarter ended June 2013. The company has reported a decrease of 10.7% YoY in net sales and 28.4% YoY in net profits respectively during the quarter. Here is our analysis of the results:

Performance summary
  • Topline of the company decreases by 10.7% YoY.
  • At the operating level, the company reported 49.7% YoY decrease in operating profits. Operating margins of the company declined by 7.6% YoY.
  • Net profits decreased by 28.4% YoY. Net profit margins decreased by 2.6% YoY.

Financial performance snapshot
(Rs m) 1QFY13 1QFY14 Change
Net sales 17,481 15,606 -10.7%
Expenditure 14,439 14,075 -2.5%
Operating profit (EBDITA) 3,042 1,530 -49.7%
Operating profit margin (%) 17.4% 9.8%  
Other income 1,403 1,787 27.4%
Interest (net) 32 -  
Depreciation 1,224 1,245 1.7%
Profit before tax 3,190 2,073 -35.0%
Exceptional Item - -  
Tax 959 476 -50.4%
Profit after tax/(loss) 2,231 1,597 -28.4%
Net profit margin (%) 12.8% 10.2%  
No. of shares (m)   2,577  
Diluted earnings per share (Rs)   2.3  
P/E ratio (x)*   12.6  
* On a trailing 12 months basis

What has driven performance in 1QFY14?
  • Net sales of the company declined by 10.7% YoY due to lower aluminium sales. Its alumina sales increased by 11.9% YoY to 283,000 tonne whereas the aluminium sales declined by 17.5% YoY to 85,000 tonnes.

  • Nalco posted 18% YoY and 14% QoQ drop in aluminium output at 84,528 tonne due to deliberate cut in output following inadequate availability of linkage coal and unviable aluminium prices using e-auctioned coal. Although alumina performance was stable with a 12% YoY rise in volume at 282,579 tonne. On QoQ basis, despite lower aluminium output, Nalco posted an 11% drop in alumina volume.

  • Aluminum segment posted 18% YoY and 17% QoQ drop in revenue due to lower volume, which led to EBIT loss of Rs 787 m versus a profit of Rs 597 m in 4QFY13 and a loss of Rs 191 m in 1QFY13. Alumina segment posted 3% YoY and 11% QoQ drop in revenue, while EBIT was down 26% YoY and 31% QoQ due to lower prices. Power revenue was down 18% YoY and 12% QoQ due to lower generation, which led to 57% YoY and 65% QoQ fall in EBIT at Rs 309 m.

  • Nalco reported operating profit of Rs 1.5 bn for 1QFY14, due to sharp increase in power and fuel cost. Power and fuel cost increased by 16.3% YoY. Staff costs as a percentage of net sales stood at 20.9%, compared to 16.5% in 1QFY13 and other expenses also increased by 16.7% YoY. As a result operating margins declined by 7.6% YoY.

    Cost break-up
    (Rs m) 1QFY13 1QFY14 Change
    Raw Materials 3,163  2,736 -13.5%
      % of sales 18.1% 17.5%  
    Staff costs 2,835  3,215 13.4%
      % of sales 16.2% 20.6%  
    Power & fuel 6,046  5,062 -16.3%
      % of sales 34.6% 32.4%  
    Other Expenses 3,096  3,614 16.7%
      % of sales 17.7% 23.2%  

  • The Other income increased by 27.4% YoY and tax rate also decreased to 23.0% compared to 30.1% in 1QFY13. Hence, the company’s net profit declined by a lower rate of 28.4% YoY.

What to expect?
Although Nalco has captive bauxite mines, the cost of aluminium production remains very high on account of high power costs. With subdued aluminium prices likely over the coming one year, we expect the company to suppress its production given its high costs of production.

At the current price of Rs 29, the stock is trading at a multiple of 12.6 times its trailing twelve month earnings. We maintain our Buy view on the stock from a long term perspective. We are in the process of reviewing our estimates and will provide an update on the target price by August 31st, 2013.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single large cap stock comprises more than 5% of your portfolio

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